New York-The Guiliano Law Group, P.C. announced today it has filed an arbitration claim on behalf of certain investors before the Financial Industry Regulatory Authority or FINRA, against a national securities broker-dealer, based upon the conduct of its former registered representative for the violation of the federal securities laws and Regulation Best Interest, and for excessive and unauthorized trading, common law fraud, breach of fiduciary duty, and the failure to supervise.
FINRA Rule 2111 requires that a member or an associated person must have a reasonable basis to believe that a recommended investment strategy, including an explicit recommendation to hold a security or securities, provides that:
(a) A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.
b) A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.
FINRA Conduct Rule 2111 (2024)(emphasis added).
As the US Securities & Exchange Commission has observed:
Reasonable-basis suitability requires a broker to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.
In general, what constitutes reasonable diligence will vary depending on, among other things, the complexity of and risks associated with the security or investment strategy and the firm’s or associated person’s familiarity with the security or investment strategy.
A firm’s or associated person’s reasonable diligence must provide the firm or associated person with an understanding of the potential risks and rewards associated with the recommended security or strategy.
Securities Exchange Act Release No. 63325 (November 17, 2010).
In this particular case, the investors allege that they were provided a series of misrepresentations, and omissions concerning the inherent risks and the speculative nature of the broker’s discretionary trading and among other things, failed to disclose that:
a) the purchases and overall investment strategy presented a high degree of risk, and were fundamentally inconsistent with the investors’ known financial condition and stated investment objectives;
b) by allowing the stockbroker to exercise complete discretion and control over the investors accounts, the investors could suffer substantial losses; and that
c) these transactions were not effected for the purpose of fulfilling Claimants’ investment objectives, but instead were designed to generate fees or other income from the short term trading of Claimants’ retirement accounts.
The Statement of Claim alleges that these misstatements and omissions of material fact made in connection with the sale of securities were effected with known risk of deceiving Claimants and constitute violations of § 10(b) of the Securities Act of 1934, and SEC Rule 10b-5, as promulgated thereunder;
The Statement of Claim also alleges that this conduct is also a violation of FINRA Conduct Rule 2110, and is actionable under §10(b) of the Securities Exchange Act of 1934, and SEC Rule 10b-5 as promulgated thereunder.
Regulation Best Interest or “Reg BI,” which became effective on June 30, 2020, established a standard of conduct for broker-dealers and associated persons in connection with the recommendation of securities transactions to retail customers. Rule 15l-1(a)(1) of the Exchange Act, 17 CFR § 240.15l-1(a)(1).
Reg BI’s Best Interest Obligation requires a broker, dealer, or a natural person associated with a broker or dealer, when making a recommendation of any securities transaction to a retail customer, to act in the best interest of that retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or associated person ahead of the interest of the retail customer.
The Best Interest Obligation is satisfied only by compliance with four Component Obligations: (1) Disclosure Obligation, (2) Care Obligation, (3) Conflict of Interest Obligation, and (4) Compliance Obligation.
The Care Obligation requires the securities broker-dealer and its associated person, or its registered representative, in making the recommendation, to exercise reasonable diligence, care and skill to:
• understand the nature of the recommended security or investment strategy involving a security—as well as the potential risks, rewards and costs of the recommended security or investment strategy—and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers based on that understanding;
• have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks, rewards and costs associated with the recommendation and does not place the financial or other interest of the member or associated person ahead of the interest of the retail customer;
• have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile and does not place the financial or other interest of the member or associated person ahead of the interest of the retail customer. Exchange Act Rule 15l-1(a)(2)(ii).The Care Obligation requires a broker, dealer, or associated person to exercise reasonable diligence, care, and skill to understand the potential risks, rewards, and costs associated with a recommendation of a securities transaction to a retail customer.
Exchange Act Rule 15l-1(a)(2)(ii)
The Care Obligation also requires a broker, dealer, or associated person to exercise reasonable diligence, care, and skill to have a reasonable basis to believe that their recommendation is in the best interest of the particular retail customer, based on that customer’s investment profile and the potential risks, rewards, and costs associated with the recommendation.
Reg BI also requires that a registered representative establish “a reasonable belief that the recommendation was in the best interest of the retail customer, and to consider reasonably available alternatives.”
In addition, Reg BI’s Compliance Obligation requires a broker-dealer to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI. According to the Adopting Release, a broker “should consider the nature of that firm’s operations and how to design such policies and procedures to prevent violations from occurring, detect violations that have occurred, and to promptly correct any violations.”
The Guiliano Law Group, P.C. is a national securities and investment fraud law firm representing investors across America and around the globe for more than thirty years with offices in Philadelphia, Pennsylvania, Los Angeles, California, and Miami, Florida.
We offer our services on a contingent fee basis, and there is never any cost or obligation for us to evaluate your claim. Offer void where prohibited. See Important Disclaimer.
For more information visit us at securitiesarbitrations.com.
